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[COMMITTEE PRINT] 



OH 



EXPLANATION OF PROPOSED FINANCIAL 
INSTITUTIONS ACT OF 1976 



COMMITTEE ON BANKING, CURRENCY 

AND HOUSING 

HOUSE OF REPRESENTATIVES 

94th Congress, Second Session 




W; -^it 






FEBRUARY 1976 



Printed for the use of the Committee on Banking, Currency and Housing 

The report has not been officially adopted by the Committee on Banking, 
Currency and Housing and may not therefore necessarily reflect the views 
of its members. 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1976 



66-144 O - 76 



COMMITTEE OX BANKING, CURRENCY AND HOUSING 
HENRY S. REUSS, Wisconsin, Chairman 



WRIGHT PATMAX. Texas 

WILLIAM A. BARRETT. Pennsylvania 

LEONOR K. (MRS. JOHN B.) SULLIVAN, 

Missouri 
THOMAS L. ASHLEY, Ohio 
WILLIAM S. MOORHEAD, Pennsylvania 
ROBERT G. STEPHENS, Jr., Georgia 
FERNAND J. ST GERMAIN, Rhode Island 
HENRY P. GONZALES, Texas 
JOSEPH G. MINISH, New Jersey 
FRANK ANNUNZIO, Illinois 
THOMAS M. REES, California 
JAMES M. HANLEY, New York 
PARREN J. MITCHELL, Maryland 
WALTER E. FAUNTROY, District of 

Columbia 
LI NOV .MRS. HALE) BOGGS, Louisiana 
STEPHEN L. NEAL, North Carolina 
JERRY M. PATTERSON, California 
JAMES J. BLANCHARD, Michigan 
CARROLL HUBBARD, Jr.. Kentucky 
JOHN J. LaFALCE, New York 
GLADYS NOON SPELLMAN, Maryland 
LES AuCOIN, Oregon 
PAIL E. TSONGAS, Massachusetts 
BUTLER DERRICK, South Carolina 
PHILIP II. HAYES, Indiana 
MARK W. HANNAFORD, California 
DAVID W. EVANS, Indiana 
CLIFFORD ALLEN, Tennessee 



ALBERT W. JOHNSON, Pennsylvania 
J. WILLIAM STANTON, Ohio 
GARRY BROWN. Michigan 
CHALMERS P. WYLIE, Ohio 
JOHN H. ROUSSELOT. California 
STEWART B. McKINNEY, Connecticut 
JOHN B. CONLAN, Arizona 
GEORGE HANSEN, Idaho 
RICHARD T. SCHULZE, Pennsylvania 
WILLIS D. GRADISON, Jr., Ohio 
HENRY J. HYDE. Illinois 
RICHARD KELLY. Florida 
CHARLES E. GRASSLEY, Iowa 
MILLICENT FENWICK. New Jersey 



(II) 



EXPLANATION OF PROPOSED FINANCIAL INSTITU- 
TIONS ACT OF 1976 

The February 1976 Committee Print, containing the proposed 
Financial Institutions Act of 1976, relies heavily on the report of the 
Commission on Money and Credit of 1961, the Hunt Commission of 
1971, the Administration's proposed Financial Institutions Act of 
1975, S. 1267, passed by the Senate by a 71-14 vote on December 11, 
107."). and on staff studies commissioned by the House Committee on 
Banking, Currency and Housing. The bill reflects testimony and com- 
ment on the FIXE study (Financial Institutions and the Nation's 
Economy) discusion principle of- November, 1975. Whenever possible, 
the bill's language follows that of S. 1267. 

I. Regulatory Agencies 

The bill addresses the present system of overlapping, confusing and 
sometimes conflicting jurisdictions and policies in bank regulation, 
by creating the Federal Banking Commission, which will assume the 
bank chartering, branching, examination, supervision, regulation, and 
holding company functions which are now in the hands of the Comp- 
troller of the Currency and the Federal Eeserve Board. In approving 
national bank chartering and branching, the FBC will strive to im- 
prove competition and prevent any undue concentration of banking 
resources which woud tend to reduce competition. 

The FBC will consist of five members, devoted to the public interest, 
with staggered five year terms, appointed by the President and con- 
firmed by the Senate. One of the five members shall be selected from 
the membership of the Federal Eeserve Board and shall serve on 
both the FBC and the Federal Reserve Board. None of its members 
need be members of any political party, and no more than three may 
belong to the same political party. The Federal Banking Com- 
mission will obtain its funding through the normal Congressional 
appropriation process. The fees it will charge banks for examinations 
will revert to the general revenues. 

The Federal Banking Commission is given increased authority to 
act quickly on mergers, without the 30-day waiting period, in the case 
of a failing bank, as recommended by the Federal Eeserve System 
in April. 1975; and to prevent dishonest or negligent banking, as by 
sing civil penalties for certain violations of the banking acts, by 
streamlining procedures for the removal of bank officers, directors, 
and employees, by broadening the power of the regulator to regulate 
the non-banking activities of bank holding companies, by broadening 
the enforcement powers of the Federal Deposit Insurance Corpora- 
tion, all as recommended by the Federal Eeserve Board, the FDIC, 
and the Comptroller in September, 1975. 

(1) 



The FDIC will be retained in its present form as an insuring agency. 
as recommended by the outgoing Chairman Frank Wille. The Comp- 
troller will be removed as one of its three members, which hereafter 
shall be by presidential apointment. confirmed by the Senate, with the 
same qualifications of devotion to the public interest as obtains for 
FDIC members, and with the same (i-war terms as FDIC members 
under present law. It is envisaged that the FDIC will act as an inde- 
pendent umpire between the state and the national banking systems. 
The FDIC will examine state-chartered insured banks itself until it 
determines that a particular state bank regulatory agency is capable of 
adequate examination, in which case the FDIC shall delegate its initial 
examining role to such state agency. The FDIC will obtain its funding 
through the normal Congressional appropriation process, and the fees 
it will charge for examinations will revert to the general revenues. 

Federal bank regulation, under the bill, would thus be centered in 
the FBC and the FDIC. In deference to custom, federal mutual sav- 
ings and loan jurisdiction would be centered in the FIILBB and the 
FSLIC; federal credit union jurisdiction in \(T A. NCUA will no 
longer l>e headed by a single Administrator, but will be replaced by a 
board of three members, devoted to the public interest, with staggered 
six-year term-. None of its members need be members of any political 
party, and no more than two may belong to the same political party. 

The FIILBB would be increased in size to five members, devoted to 
the public interest. None of its members need be members of any politi- 
cal party, and no more than three may belong to the same political 
party. The FIILBB would obtain its funding through the normal 
( longressional appropriation process, and the fees it will charge mutual 
savings banks and savings and loan associations for examinations will 
revert to general revenues. 

II. Depository [NSTrrunoNfi 

7. Inti rt sf on Time and Savings Deposits 

a. Tin ceiling. — The bill adopts the formula of S. 1267 with respect 
to terminating the Regulation Q interest rate ceilings on time and sav- 
ings deposits, Five and one half years after enactment, which could 
he approximately January 1. 1982. During this period, the Coordinat- 
ing Committee (the newly-created Federal Banking Commission, the 
Federal Home Loan Bank Board, the Federal Reserve Board, and the 
FDIC) is to administer the ceiling so as to give the small saver a 
reasonable rate of ret urn. and to prevent undue disintermedial ion both 
bei ween the various depository institutions, and away from the deposi- 
tory insl it ut ions. The ( 'oordinat ing ( 'onimit tee is to report to Congress 
six months prior to i he termination date its recominenaat ions and tind- 

is to the effect of termination in the economic environment then 
tiling, -o as i<» give ( 'ongress an opportunity to continue Regula- 
t ion Q 1 1' to do so would serve the public interest. 

b. Tit, differentia]. The bill allows payment of n ] \ of 1 percent 
premium interest rate on time and savings deposits to various deposi- 
tor) institutions which choose to maintain a substantial portion of their 
assets in residential mortgages (not including construction Loans). In 
oider to pay i his premium rate, a savings ami loan associat ion or mu- 
tual savings hank musl have at leas! 7<> percent of all new assets it 



obtains after April 1. 1977. in residential mortgages, and maintain a 
ratio of residential mortgages (not including construction loans) to 

total assets no less than the ratio it had on December 31. 197f). or 70 
percent, whichever is lower. A commercial bank, which under existing 
Regulation Q is not eligible to pay the higher rate, will be permitted to 
do so if it has total assets of under $25 million, has at least 35 percent 
of all new assets (roughly TO percent of new time and savings ac- 
counts)- it obtains after April 1, 1977, in residential mortgages, and 
maintains a ratio of residential mortgages (not including construc- 
tion loans) to total assets no less than the ratio it had on December 31, 
1975. The purpose of all this is to help all housing-oriented institutions 
in a manner generally equitable as between classes of institutions. The 
agency members of the Coordinating Committee shall promulgate ap- 
propriate and timely regulations concerning the implementation of 
thin provision. 

c. Reports. — The bill provides that the Coordinating Committee re- 
port annually to the Congress on its justification for the maximum 
allowable rates fo interest (e.g. why they were not set higher) which 
is set for the previous year as well as its recommendation whether the 
differential permitted during the previous year should be changed up 
or down. 

2. Interest on Third Patty Payment Accounts 

The bill removes the current statutory prohibition against the pay- 
ment of interest on third party payment accounts, as of January 1, 
1978. After this date all financial institutions will be permitted to pay 
interest on third party payment accounts up to a maximum rate which 
will be determined by the Coordinating Committee. The Coordinating 
Committee will have to justify in an annual report to the Banking 
Committees of the House and Senate the interest rate it lias set. It is 
expected that the Committee will, in increasing the permissible inter- 
est rate from its present zero, take into account general economic con- 
ditions, the interest of the consumer, and the impact this will have on 
the financial institutions affected. 

J. Disclosure 

To insure that borrowers and depositors receive sufficient informa- 
tion to make sound judgments regarding banks, the Federal Banking 
Commission is directed to promulgate regulations within six months of 
the bill's effective date, requiring appropriate disclosure from all banks 
and bank holding companies. The Commission may not impose new re- 
porting burdens which are disproportionate to the usefulness of the 
information to be obtained. 

4. Reserve Requirements 

The power to grant checking accounts by federal credit unions, sav- 
ings and loan associations, and mutual savings banks entails the obli- 
gation of reserve requirements for such accounts. The bill provides 
that, since these financial institutions will now be in a position to 
compete equally for third party payment accounts, they should be 
treated alike on reserve requirements. At the same time, the present 
law, which allows state banks which choose to escape Federal Reserve 
reserve requirements to do so, should be amended. Consequently, the 
Federal Reserve Board is directed to set reserve requirements, to be 
maintained at a Federal Reserve Bank or in vault cash, for all institu- 



tions with more than $15 million in third party payment deposits. For 
all these additional institutions thus subjected for the first time to 
reserve requirements, the Board is directed to phase-in the reserve re- 
quirements over a five-year period. The bill directs the Federal Reserve 
to conduct a study, and to report its recommendations to the Congress 
by December 31, 1977 of the desirability of the Federal Reserve's pay- 
ing interest on required reserves on both time deposits and third party 
payment accounts (with special emphasis on time deposits), together 
with findings on how much of the resulting loss of federal revenues 
could be recouped by the Fed's charging financial institutions for the 
service functions it performs for them. 

•'>. Mutual Savings Banks 

The bill permits de novo chartering, and conversion of state- 
chartered mutual savings banks to a federal charter, upon approval 
by the Federal Home Loan Bank Board. Upon conversion to a federal 
charter, a particular state-chartered mutual savings bank may con- 
tinue all activities carried on by it as of December 31, 1975. In issuing 
federal charters, the Board is instructed to give primary consideration 
to the best practices of thrift institutions and the needs of the families, 
consumers and communities to be served. Federal mutual savings banks 
are given expanded powers — to accept demand deposits ; to engage in 
expanded consumer lending, including credit cards and revolving lines 
of credit; to invest in commercial paper, corporate debt, and bankers 7 
acceptances; and to engage in traditional trust department activities, 
including acting as trustee, executor, administrator, registrar of secu- 
rities, guardian, and similar activities, upon a finding b} r the Federal 
Home Loan Bank Board that the institution has adequate financial 
and managerial resources and future prospects. 

C. Savings and Loan Associations 

The bill gives federal savings and loan associations the demand 
deposit, lending, and investment powers authorized by S. 1267 — 
checking accounts; consumer, development, construction, commercial 
real estate, and education loans; investments in corporate debt secu- 
rities, commercial paper, bank deposits, and bankers' acceptances; and 
trust department activities, including acting as trustee, executor, ad- 
ministrator, registrar of securities, guardian, and similar activities, 
upon a finding by the Federal Home Loan Bank Board that the 1 insti- 
tution has adequate financial managerial resources and future 
prospects. 

S. 1267 provides that these expanded powers are available only to 
a federal savings and loan association with 70 percent of its loan port- 
folio in housing. This bill contains no similar provision, in the Belief 
that thus limiting the expanded powers provision would be self- 
defeating. Instead, this bill permits a federal savings and loan asso- 
ciation to invest in excess of 30 percent of its assets in other than 

residential mortgage Loans, but if it does so it will not be permitted to 
pay the interest premium (usually y 4 of 1 percent) on nine and sav- 
ings deposits permitted those institutions which remain primarily 
housing-oi Iented. 

7. Credit Unions 

Credit union- are granted :i substantial expansion of their powers, 
as proposed in the Credit Qnion Financial Institutions Bil] of 1975 



and in S. 1267, passed by the Senate in December, 1975 — the ability to 
offer checking accounts ; to issue share certificates with varying divi- 
dend rates and maturities ; to make secured and unsecured loans over 
longer terms and in higher amounts than currently permitted ; to offer 
owner-occupied, residential home mortgage loans (in value not more 
than 150 percent of the median value of homes in the area) ; and to 
engage in trust activities upon approval by the NCUA on the same 
terms as federal mutual savings banks and savings and loan associ- 
ations. A central discount fund to deal with emergency liquidity 
problems of credit unions is established. 

III. Housing 

The bill offers two major means of ensuring an adequate flow of 
funds for housing. An adequate flow of funds for housing is particu- 
larly needed since the housing-oriented thrift institutions are author- 
ized by the bill to diversify their loan portfolios, which taken by itself 
could mean a dilution of their present housing portfolios. 

1. First, as described under II., the bill shapes the interest rate dif- 
ferential of Regulation Q so as to permit depository institutions to pay 
a higher interest rate on savings and time deposits only to the extent 
that they maintain a principal orientation toward residential 
mortgages. 

2. Because this permission to pay a differential will not of itself 
be sufficient to ensure an adequate supply of funds to residential mort- 
gage markets in times of disintermediation and tight money, a second 
provision of the bill creates a new program. In order to provide funds 
for housing construction during periods of housing credit shortage, 
the bill authorizes the Federal Home Loan Bank Board to expand its 
current system of five-year "advances" to savings and loans to a sys- 
tem of long-term (up to 30-year) loans to commercial banks, mutual 
savings banks, credit unions and savings and loans, provided the funds 
are relent to borrowers for non-luxury housing (not more than 150 
percent of the median value of the ownership or rental unit). In pe- 
riods of tight money, FHLBB would borrow directly in the market, or 
by using the Federal Financing Bank. The Treasury, or the Federal 
Financing Bank, would have the power to determine the maturity of 
their borrowing in the market, but they would have to comply with 
the FHLBB 's request that the borrowing be made. It is hoped that 
insurance companies and pension funds would be active purchasers of 
this debt, thus making their long-term funds available for housing 
which now has to depend too much on short-term sources of credit. 

In turn, the Board would make these funds available to financial 
institutions at cost, plus a charge calculated to cover its administrative 
costs. The institutions, in turn, would charge their mortgage borrowers 
an interest rate that would reflect the institutions' costs. 

A reasonable portion of these funds would be available for con- 
struction loans. 

Regulations would assure that the benefits of moderate interest 
rates would pass through to rentors and to the ultimate purchaser in 
a construction loan situation. 

The advances would be repaid to FHLBB by the financial institu- 
tion as the residential mortgage loan was amortized; if the loan were 



6 

sold prior to maturity, the financial institution would be obligated to 
repay the FHLBB in full. 

This provision of the bill aims to ensure that when funds for resi- 
dential mortgage loans are otherwise insufficiently available. FHLBB 
will cause such funds to be borrowed in the market, (thus "crowding 
out" credit demands deemed less meritorious). The funds thus ob- 
tained would then be relent by the FHLBB to financial institutions 
for non-luxury residential mortgage loans. The program would be op- 
erated without cost to the taxpayer, other than that caused by the 
additional demand on the credit market. 

The mortgage interest tax credit, suggested by the Administration's 
•licial Institutions Act of 1975, would cost taxpayers an estimated 
8800 million annually, with no assurance that it would appreciably 
increase the flow of housing credit. It is believed that the two induce- 
ments to housing finance here suggested will be both more effective, 
and less costly to the taxpayer. 

IV. Bank Holding Companies 

The FBC is required, with 90 days of January 1, 1977, the effective 
date of this bill, to file with both Houses of Congress its then existing 
list of permissible bank holding company activities. 

Any new permissible activity approved by the Commission would 
have to be filed within 30 days of promulgation by the FBC and 
would be subject to veto by resolution of either House of Congress 
Within 90 days. 

The existing powers of banking regulatory agencies to regulate 
transactions between bank holding companies and banks and their sub- 
sidiaries and affiliates are conferred on the FBC and extended to cover 
transactions with other closely related business entities such as real 
estate investment trusts. 

The FBC is authorized to promulgate regulations to assure against 
public confusion as to the names and separate identities of subsidiaries 
and related affiliates (including advisory relationships such as with 
real estate investment trusts) of bank holding companies. These regu- 
lation- would take effect no later than January 1, 1978, except that 
the FBC may giant exemptions for an additional two years. 

A bank holding company is prohibited from acquiring ownership 
or emit rol of the shares of a savings and loan association. 

V. The Federal Reserve System 

The bill makes a number of changes in the present structure of the 
:.il Reserve System— changes not merely for the sake of change, 
to permit the Federal Reserve to focus its energies on the shaping 
of monetary policy. 

The hill retains t\\i' presenl length of terms for the members of the 
Federal Reserve Board of Governors, and the size of the Board, The 
date- of the four year term of the Chairman of the Board is changed 
o that it coincides, with a six-month lag, with the term of the IJ.S. 
President, as recommended by Chairman Arthur Burns. The Chair- 
man's appointment will be made by the President, subject to con- 
firmation by the Senate. As present terms expire, the 1 -J presidents of 



the regional banks of the Federal Reserve System, because of their 
importance as regional rotating members of the Federal Open Market 
Committee, will also be nominated by the President ancl confirmed 
by the Senate. 

The requirement of ownership of Federal Reserve stock by member 
banks will be abolished since "member" bank status is abolished. Re- 
serve requirements are imposed on all institutions similarly situated. 
All institutions that are required to meet reserve requirements would 
have direct, full and equitable access, under appropriate regulations. 
to Federal Reserve services, including the discount window and wire 
tarnsfer system. Those banks which presently own stock in the Federal 
Reserve banks may either retain this stock, or voluntarily obtain re- 
payment by the Federal Reserve. 

The Boards of Directors of the regional Federal Reserve banks will 
he increased in size from 9 to 12 members. They will be nominated by 
their regional President, and elected by the Board of Governors in 
Washington. Six of the members will be representative of the finan- 
cial institutions which maintain reserves with the Federal Reserve, 
with due consideration to the diversity of these financial institutions, 
their size, and their geographical distribution within the Federal Re- 
serve legion. The other six members will be selected from the remain- 
der of the public, must be reasonable representative of the popula- 
tion characteristics of the Federal Reserve district, and must offer 
fair representation to business, farming, labor, education, and 
consumers. 

The bill requires the Federal Reserve Board to pursue policies — 
maximum production, employment and purchasing power (which 
means anti-inflationary price stability) — consistent with the policy ob- 
jectives of the Employment Act of 1046. It also makes permanent the 
provisions of House Concurrent Resolution 113 of March, 197.5. which 
requires the Federal Reserve Board to consult with the Congressional 
Banking Committees at quarterly hearings on the monetary goals 
which the Federal Reserve Board intends to pursue in the next twelve 
months. 

VI. Foreigx Banks ix the United States 

This provision is intended to establish a national policy on foreign 
banks entering and operating in the United States, and a svstem of 
supervision and regulation of these operations by the Federal Banking- 
Commission. It follows closely the 1975 recommendations of the Fed- 
eral Reserve Board. It is intended to give foreign banks the same op- 
portunities to conduct domestic banking in the United States that are 
available to domestic banks, and to subject them to similar supervi- 
sion and regulation. 

The bill requires that all banking branches and agencies of foreign 
banks established in the United States be chartered by the Federal 
Banking Commission. Federal charters would also be available to sub- 
sidiaries of foreign banks. For these subsidiaries, one third of the di- 
rectors of a foreign bank can be non-citizens of the United States. 
Foreign banks would also be permitted to establish Edge Act corpora- 
tions under the same conditions as apply to such corporations estab- 
lished by U.S. banks. Before such approval is granted, however, the 
Federal Banking Commission would be required to consult with the 



8 

Treasury Department and the Secretary of State, and to make a deter- 
mination that approval of the application would not adversely affect 
the domestic or foreign commerce of the United States. 

The principal distinctions between the bill and the Federal Reserve 
Board's proposal are three : 

1. The Fed's proposal mandates compulsory Fed membership for 
foreign banks, a requirement not visited on U.S. banks. The bill, on 
I ho principle of non-discrimination, rejects compulsory membership. 

-2. The Fed's proposal requires insurance by the FDIC on the de- 
posits of a domestic branch, agency, or a subsidiary of a foreign bank. 
The bill, instead, requires that foreign banks maintain a surety deposit 
with the FDIC. in an amount sufficient to give coverage like that given 
by FDIC insurance. 

3. The Fed's proposal grandfathers the existing ownership of secu- 
rities underwriting and non-banking companies, and the multi-state 
banking operations of foreign banks. The bill, instead, provides that 
such activities, not permitted domestic banks, must be phased out 
within five years of the bill's effective date. 

VII. United States Banks Abroad 

The bill gives the Federal Banking Commission authority to regu- 
late the international operations of United States banks and bank 
holding companies : 

1. Ir requires a bank to seek the approval of the Commission before 
it can participate in international operations through branches, sub- 
i ies, affiliates and joint ventures. Before granting such approval, 
the Commission must make an affirmative decision that the proposed 
foreign undertaking by the U.S. bank will not endanger the applicant 's 
capital or, directly or indirectly, unduly lessen competition in the 
United States, or tend to create a monopoly in the United State-. 

•J. It permits U.S. banks to carry out international banking opera- 
tions, comparable to operations undertaken in foreign branches, 
through separate departments in the home office of the bank, thus 
avoiding the need for wasteful and unnecessary offices in the Bahamas 
or i he ( rrand Caymans. 

:'». It would permit U.S. banks to establish and operate branches in 
countries which do not permit the Federal Banking Commission to 
examine the branch and to have complete access to its records, unless 
the FBC determines that the capital of the parent would be endan- 
gered by such branching activity. The Commission is also authorized 
to permit banks and bank holding companies to establish subsidiaries 
or joint ventures only in countries where i( can conduct an examination 
t<> determine that the capital of the parent or any other participating 
over which it has jurisdiction would not be endangered. 

o 



UNIVERSITY OF FLORIDA 



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